The Puppet Masters: How the Corrupt Use Legal Structures to Hide Stolen Assets and What to Do About It

Washington, October 24, 2011 –Most large-scale corruption cases involve using legal entities to conceal ownership and control of corrupt proceeds, and policymakers should take steps to improve transparency to reduce opportunities for wrongdoing, according to a study released today by the Stolen Asset Recovery (StAR) Initiative of the World Bank and the United Nations Office on Drugs and Crime.

“We need to put corporate transparency back on the national and international agenda,”said Emile van der Does de Willebois, World Bank Senior Financial Sector Specialist who led the StAR research team. “It is important for governments to increase the transparency of their legal entities and arrangements and at the same time improve the capacity of law enforcement.”

The report, The Puppet Masters: How the Corrupt Use Legal Structures to Hide Stolen Assets and What to Do About It, examines how bribes, embezzled state assets and other criminal proceeds are being hidden via legal structures – shell companies, foundations, trusts and others. The study also provides policy makers with practical recommendations on how to step up ongoing international efforts to uncover flows of criminal funds and prevent criminals from misusing shell companies and other legal entities.

The study explains how corrupt public officials and their associates conceal their connection to ill-gotten funds by exploiting legal and institutional loopholes that allow opacity in companies, foundations and trust-like structures. It also lists obstacles to investigating and establishing the origin and ownership of stolen assets: the difficulty of identifying where legal entities operate and have business relationships, lack of access to information on beneficial ownership and the use of complex and multi-jurisdictional corporate structures.

Drawing on evidence from relevant stakeholders, the report advises policymakers on how to effectively address the problem of corrupt payments made through opaque companies. In particular, the study recommends that more detailed information be collected in corporate registries, and that providers of legal, financial and administrative (incorporation and management) services to legal entities more effectively conduct due diligence on those controlling corporate entities.

The study is based on research including an analysis of 150 grand corruption cases and an examination of the practices of 40 jurisdictions and their company registries in collecting, updating and providing access to beneficial ownership information of legal entities. The report also draws on the experiences of more than 77 experts from 33 jurisdictions in investigating the misuse of transnational legal structures.

Main Recommendations of the Study

Governments should adopt a strategy to combat the misuse of companies and foundations to conceal ill-gotten funds. The strategy should determine what types of companies are being used within the jurisdiction to hide proceeds of crime and how to make such entities and structures more transparent. Bearer shares (an equity security that is wholly owned by whoever holds the physical stock certificate) should be abolished or immobilized.

All providers of financial and corporate services to companies should collect beneficial ownership information about the company and continue to monitor whether this information is accurate. Providers of legal, financial and administrative (incorporation and management) services to legal entities are often in the best position to understand their clients and distinguish between legal fiction and reality. They should be required to identify beneficial ownership and provide information to law enforcement when necessary.

All corporate registries should provide a certain minimum standard of information on registered entities and allow for easy (on-line) searches of this information. At a minimum this should include information on shareholders, members and directors, as well as historical background.

Strengthen investigative skills and capacity. Expand training and ensure adequate manpower and budgetary resources to conduct complex, transnational investigations.

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